Dissecting Google’s Earnings

Google (GOOGL) reported earnings after Tuesday’s close that were phenomenal.

Shares shot up almost 10% the following day as the company announced a long awaited 20 for 1 stock split.

You might remember Apple (AAPL) and Tesla (TSLA) shares running hard from the time they announced their stock splits and the event.

We expect Google to experience similar price action.

In part because the lower share price now makes it tradeable for retail investors.

And we know they’re interested because it was the 10th most searched stock that reported earnings in the last month and retail interest surged 101.5% in the last week.

But once the dust settles, do the company’s fundamentals justify its lofty price?

Google’s Business

Anyone unfamiliar with Google hasn’t been online in the last 20 years.

Google is a search powerhouse that’s become synonymous with searching the internet that people say ‘Google it.’

The parent company, Alphabet, runs three main divisions:

1. Google Services – Google services breaks down as follows:
   1. Google Advertising which further breaks down into:
      1. Google search & other (57.8% of revenues)
      2. YouTube ads (11.2% of revenues)
      3. Google network (12.3% of revenues) – Includes AdSense, AdMob, and Google Ad Manager
   2. Google Other (10.9% of revenues) – YouTube non-advertising (subscriptions) and hardware as well as Google Play.
2. Google Cloud (7.5% of revenues)
3. Other Bets (0.3% of revenues) – Various projects across different stages from R&D to commercialization such as self-driving technology and other ‘moonshots.’

By geography:

• US – 46%
• Europe, Middle East, & Africa – 31%
• Asia Pacific – 18%
• Other Americas – 5%

Financials

What made Q4 such a big deal for Google?

For starters, total revenues for the company climbed 41% compared to 2020 with every category hitting double-digit growth. In fact, search, YouTube, and cloud all rose by more than 40%. 

The worst performing segment was ‘other bets’ which only grew at 15%.

In 2021, Cloud reduced losses by 44.7% while other bets losses actually increased by 18%.

Cloud continues to perform better as revenues increase and the company realizes economies of scale. 

Total cash provided by operations jumped by a whopping 40.7%, though as a percentage of revenue, dropped from 35.7% to 35.5%.

While long-term debt did increase from $13.9 billion to $14.8 billion, that’s peanuts compared to the amount of cash the company generates, not to mention the nearly $140 billion in cash the company keeps on hand.

To give you an idea, that works out to $205.37 a share, or 6.8% of the current share price.

Valuation

With 2021 in the books, Google closed out the year with EPS of $112.20, giving it a P/E ratio of ~26.4x.

While that might seem high, consider that 2020’s EPS was $58.61.

The growth rates Google is hitting are so high that the P/E ratio looks incredibly cheap. Forward estimates put 2023’s EPS at $132.49 or +18% and revenues up 15.71% which we think may be understated on both accounts.

Frankly, a company of Google’s size shouldn’t be able to hit these kinds of growth rates.

And yet, it has an incredible amount of runway in Cloud alone.

Plus, the company generates $91.65 billion in operating cash annually or $134.78 per share, giving them a price to cash flow ratio of a bit more than 21x.

Considering that cash jumped by more than 40% in the last year, this is still a fantastic value.

Our Opinion – 10/10

We expect shares to climb up into the stock split despite the slight pullback.

But even afterward, Google has an incredible business with so many potential profit avenues it’s easy to see why analysts love this stock.